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Howard Davies Speech

Howard Davies Speech

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Published by: mattpauls on Jun 19, 2010
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William Taylor Memorial Lecture- number 9Two Cheers for Financial StabilityHoward Davies, Director of the LSEWashington 25
 I was greatly honoured when Paul Volcker asked me to deliver tonight’slecture, which I believe is the 9
in what has so far been a very distinguishedseries. I know the series is distinguished because, in preparation for thisevening, I read the previous 8 lectures. They are mostly available from theG30 at the modest price per unit of $10, though the last 2, by Stan Fischerand Bill McDonough, can be had for $10 the pair
. This is an unusualexample of dramatic price deflation which I am sure Paul Volcker, in hisprofessional life at the Federal Reserve, would have tried hard to avoid.Sadly, I did not have the opportunity to know Bill Taylor personally, since Icame into the world of banking supervision only in 1995. But I know of hiswork by reputation, and I am sure that Bill McDonough was right to describehim, in 2002, as a man who “embodied the ideals of a central banker andbank supervisor: measured, professional and impartial” 
. We would all beproud to have such adjectives associated with us at the end of our careers.Bill Taylor also, of course, served as Chairman of the FDIC. In the UnitedKingdom, for historical reasons, we have no obviously equivalent body, butwe are well aware of the hugely important role which the FDIC plays in the American banking system, as the penultimate line of defence in the event of abanking crisis.I hope that my subject matter this evening, Financial Stability, would havebeen of interest to Bill Taylor in both his key roles, at the Fed and the FDIC.He may have been puzzled by my title: “Two cheers for Financial Stability”,with its implication that my enthusiasm for the concept is somewhat qualified.
The William Taylor Memorial Lectures 7 and 8. Stanley Fischer and William J. McDonough(www.group30.org)
My aim is to reflect on what we mean by Financial Stability, and what we do,or should do, in its service. The thoughts I offer will be from a severelypractical perspective, though I have laboured through some of the theory.Because while I am no longer an active regulator, I am not quite anacademic. When you pay your $10, or perhaps $5 for the printed version, youwill find footnotes, and the other accoutrements of an academic production,but I am not writing for a refereed journal. So the only authentic academicfeature tonight will be a concluding plea for more research – which I havelearnt is the obligatory coda at the end of any self-respecting piece of work from a university.The Financial Stability IndustryThe Financial Stability industry has been growing so rapidly in recent yearsthat it is surprising to note that the term itself is of relatively recent coinage. A paper published just a few months ago by Bill Allen, until recently of theBank of England, and Geoffrey Wood of City University in London
recordsthat “ the Bank of England used the term in 1994 to denote those of itsobjectives which were not to do with price stability or with the efficientfunctioning of the financial system. We are not aware of any earlier usage of the phrase”. Certainly if you look at Allan Greenspan’s 1996 Bill Taylor lecture,which talked of banking crises, you will not find the term used.
Yet,nowadays, it would be hard to find a speech on the financial system, by acentral banker or a regulator, which was not peppered with the phrase.I think it is right that the first regular publication with Financial Stability in thetitle was the Bank of England’s Financial Stability Review
, first launched in1996. I have to confess (and I shall come on to explain why I use that verb)that I was the prime mover in establishing that publication, which we
Defining and Achieving Finanical Stability. William Allen and Geoffrey Wood. Cass BusinessSchool. LSE Financial Market Group Paper 160. April 2005
William Taylor Memorial Lecture 3. Global Risk Management. Alan Greenspan 1996(www.group30.org)
Financial Stability Review. Bank of England 1-18. (www.bankofengland.co.uk)
produced in collaboration with the then securities regulator in London, theSecurities and Investments Board. The early working title was, in fact, ‘Prudence’ – which had three advantages: it captured the drift of many of thearticles well, it became – of course – Gordon Brown’s favourite word, and ithappens to be my wife’s name. But Eddie George was not amused, so theFinancial Stability Review it was.The confession is that the real reason why we established the Review at thattime was to stake out the Bank of England’s territory in financial supervisionahead of the 1997 election, which we thought might bring change to the UK’sregulatory system. While no firm reform plans were then on the table, weknew that, after BCCI and Barings, as a banking supervisor the Bank was onthe back foot. Even though, I would assert, the Bank did essentially the rightthing in each case and was, overall, rather a good banking supervisor.Indeed much of the risk-based approach taken by the FSA has its origins inthe Bank of England.Furthermore, the then rather elaborate British system of statutory and self-regulatory organisations in the securities market was ripe for reform. Wesuspected that, whoever won the election, there would be a reorganisation.So we agreed that the then Deputy Governor – me – should become amember of the Securities and Investments Board and that we should work together around a new publication, which demonstrated that the Bank had animportant contribution to make to the theory and practice of financialregulation. We were deploying our tanks in a forward position, ready for theturf war we expected to break out.In retrospect, while it did succeed in raising the tone of the debate, this wasan entirely unsuccessful attempt to protect the Bank’s role in institutionalsupervision. After the election the Bank’s armoured columns were rolled back overnight, out of the securities markets, and out of banking as well, leaving just a small brigade in the ultimate central banking redoubt – the paymentssystem. But in spite of the base motivation, and the lack of success in our

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